(Kitco News) - The gold market continues to see significant selling pressure as investors capitulate to the idea that the Federal Reserve will maintain its restrictive monetary policy longer than expected.
The gold market is testing critical support just above $2,300 an ounce and is down more than 2% on the first day of the Federal Reserve's monetary policy meeting. Gold has lost nearly 6% after hitting a record high above $2,448 an ounce three weeks ago.
The selling pressure comes as markets have priced out potential rate cuts in June and July; however, one analyst says that gold's bull rally is far from over.
In an interview with Kitco News, Robert Minter, Director of ETF Strategy at abrdn, painted a picture of a world turning to gold as a safeguard against fiscal imprudence and political volatility, suggesting a bullish outlook for the precious metal in the face of growing global uncertainties.
"Gold is just getting started," Minter said. "$2,400 is definitely not the high-water mark for gold."
Minter described gold's recent price action as short-term volatility. He pointed out that the negative correlation between precious metals and bond yields has been broken for nearly two years.
"The current gold price rally isn't driven by interest rates but by a broader set of macroeconomic and geopolitical factors," he said. "The expansion of the BRICS coalition last August is a testament to a shifting global economic landscape, influencing gold markets as countries increasingly seek stability in higher gold reserves. As long as geopolitical tensions persist and economic policies continue to provoke uncertainty, gold will play its part as a cornerstone of stability."
Not only has geopolitical uncertainty driven safe-haven demand for gold, but Minter also pointed out that it is driving foreign investment away from the U.S. dollar. He believes that bond yields will continue to rise in this environment.
While higher bond yields are traditionally a headwind for gold, Minter said investors need to understand why yields are rising. They aren't rising because there is a lot of optimism regarding the health of the U.S. economy.
He said bond yields are rising because investors demand higher rewards for growing risks.
"At some point, the bond market vigilantes will be back because government spending is out of control," he said. "The interest expense on US government debt is more than the expenditure on U.S. defense. There is an alternative to holding U.S. Treasuries, and that is holding gold. Generalist investors don't see this yet, but they will at some point.
At the same time, Minter said that the U.S. will continue to see higher yields at a time when consumers can least afford them. He noted that rising prices and higher borrowing costs are squeezing consumers.
"Inflation isn't just a number on a page, it's eating into consumer purchasing power significantly," he said. "Just look at the rising costs of living, from auto insurance premiums surging by 30% to home insurance climbing by 15% this year alone. These aren't abstract numbers, they're realities hitting American wallets hard."
In this environment, Minter said that he expects it's only a matter of time before investors jump back into the gold market to protect their wealth and purchasing power. He added that renewed ETF demand will spark a new leg higher in gold's rally this year.
